Hail The World's New Car King

In mid-May, Toyota's new chief, Akio Toyoda, rolled onstage in Tokyo in the automaker's latest Prius electric-gas hybrid. Speaking to the audience as well as answering questions through an online avatar in a virtual forum, he was the epitome of a new-age, Internet-savvy auto executive.

A few days later, his race-car-driving alter ego, alias Morizo, was throwing a V10 Lexus around a German racecourse in a gas guzzling 24-hour endurance race. It's the drive of that private speed junkie rather than the public tree hugger that Toyota may need to stem losses.

Toyoda, 53, took the wheel of Japan's leading carmaker Tuesday when shareholders rubber-stamped his appointment as president, a promotion that makes him the world's undisputed car king, heading a company founded by his grandfather, Kiichiro Toyoda. The unrelenting success of the auto behemoth has played no small part in wrecking two of Detroit's big three, General Motors and Chrysler.

After 71 years of unbroken profit, Toyota has $56 billion stashed away, so he inherits a wealthy kingdom.

But all is not well in Toyota-land. Toyota needs some of the speed that its new boss thrives on to drag itself back into profit, says Koji Endo, an auto analyst for Credit Suisse in Tokyo. "The company has to move quickly. It has to take more drastic measures," Endo explained.

The company is bleeding money. In the year that ended in March Toyota lost $4.4 billion dollars. This business year it predicts a deficit of $5.5 billion even after lopping $4.6 billion off fixed costs.

Standing next to a new model of Toyota's Crown Majesta in a Tokyo showroom in March, outgoing boss Katsuaki Watanabe demonstrated the problem. Holding his right arm up diagonally as though blocking a punch, the executive, who took Toyota to pole position in the auto industry, was showing where Toyota's sales were supposed to be. His left arm slanting down underneath represented the collapse in car sales that had blindsided his industry.

The arithmetic is brutal. Toyota factories around the world running at full tilt can build close to 10 million cars a year; four million of those in Japan, the rest in plants overseas. Toyota sales this year, however, will barely scrape above 6 million vehicles, which leaves an awful lot of idle capacity.

Watanabe in March estimated industry sales in the U.S. at 10 million vehicles in 2009, 6 million fewer than two years ago.

For the past several months, Watanabe has been beating a recovery path for Toyoda to follow. At the strategy's core is Toyota's hybrid technology.

At the May Prius launch, his first public outing since being named to the top job in Toyota, Toyoda bragged about a lengthy waiting list for the new Prius model. In 2009 sales of hybrids worldwide may grow to as many as 400,000 units compared with 285,000 last year.

Within ten years every Toyota model may be a hybrid, reckons Kota Yuzawa, an analyst for Goldman Sachs in Tokyo, Other automakers as yet just don't have the technological flexibility to fit both big and small vehicles with the fuel-saving system. As a long term strategy "it's going to be a winner," Yuzawa insists.

In the meantime, however, there are still plenty of idle hands at Toyota and a recovery in the world's biggest auto market, the U.S., will be slow, crawling back to about 14 million cars annually over the next four or five years.

Toyoda "has to justify 10 million capacity," says Goldman's Yuzawa.

That means he will have grab a bigger slice of the Chinese market with low-cost, high quality cars that will tempt emerging market motorists, who are more numerous but less affluent than their American counterparts. China is already overtaking America in volume and in decade, the Chinese may be buying as many as 20 million cars a year.

But like the move to hybrids, it's not an immediate fix. To make a difference soon, Toyoda has to slash costs. The new Toyota boss has kept quiet about if or how he will pare back expenses. He declined to talk to Forbes. "So far we haven't heard what he wants to do," notes Chris Richter, analyst at CLSA in Tokyo.

He has some hard choices to make; the toughest of them all will be the prickly question of what to do about Toyota's factories in Japan. Toyota has never sacked regular workers. Mass layoffs in Japan are seen as mean-spirited and rarely attempted. For Toyota it is more difficult still because many of its plants are concentrated in a former spinning town in central Japan that renamed itself Toyota City in honor of its biggest employer.

And in follow-my-leader Japan, what the country's biggest corporation does will be scrutinized and likely copied by other companies.

Toyoda may be tempted swerve around the hard decisions, but to do so may cost Toyota dearly. The carmaker has too many platforms, too many dealerships, too many suppliers and too many workers, explains Credit Suisse's Endo. The adjustment, he says, has "to be drastic" and will "be painful."